[Federal Register: April 9, 2004 (Volume 69, Number 69)]
[Proposed Rules]
[Page 18834-18841]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09ap04-11]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 18834]]
DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 1124
[Docket No. AO-368-A29; DA-01-06]
Milk in the Pacific Northwest Marketing Area; Decision on
Proposed Amendments to Marketing Agreement and to Order
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule.
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SUMMARY: This document proposes to adopt as a final rule, order
language contained in the interim final rule published in the Federal
Register on Tuesday, November 19, 2002, concerning pooling provisions
of the Pacific Northwest Federal milk order. This document also sets
forth the final decision of the Department and is subject to approval
by producers. Specifically, this final decision would adopt amendments
that would continue to amend the Pool plant provision; which
established a ``cooperative pool manufacturing plant'' provision and
established system pooling for cooperative manufacturing plants.
Additionally, this final decision would adopt a previously amended
Producer milk provision which established a standard for the number of
days during the month that the milk of a producer would need to be
delivered to a pool plant in order for the rest of the milk of that
producer to be eligible to be diverted to nonpool plants. A year-round
diversion limit of 80 percent of total receipts for pool plants
previously established and authority granted to the market
administrator to adjust the touch-base standard is adopted on a
permanent basis.
FOR FURTHER INFORMATION CONTACT: Gino M. Tosi, Marketing Specialist,
Order Formulation and Enforcement Branch, USDA/AMS/Dairy Programs, Stop
0231--Room 2971, 1400 Independence Avenue, SW., Washington, DC 20250-
0231, (202) 690-1366, e-mail address: gino.tosi@usda.gov.
SUPPLEMENTARY INFORMATION: This administrative action is governed by
the provisions of Sections 556 and 557 of Title 5 of the United States
Code and, therefore, is excluded from the requirements of Executive
Order 12866.
The amendments to the rules proposed herein have been reviewed
under Executive Order 12988, Civil Justice Reform. They are not
intended to have a retroactive effect. If adopted, the proposed
amendments would not preempt any state or local laws, regulations, or
policies, unless they present an irreconcilable conflict with this
rule.
The Agricultural Marketing Agreement Act of 1937, as amended (7
U.S.C. 601-674), provides that administrative proceedings must be
exhausted before parties may file suit in court. Under section
608c(15)(A) of the Act, any handler subject to an order may request
modification or exemption from such order by filing with the Department
of Agriculture (Department) a petition stating that the order, any
provision of the order, or any obligation imposed in connection with
the order is not in accordance with the law. A handler is afforded the
opportunity for a hearing on the petition. After a hearing, the
Department would rule on the petition. The Act provides that the
district court of the United States in any district in which the
handler is an inhabitant, or has its principal place of business, has
jurisdiction in equity to review the Department's ruling on the
petition, provided a bill in equity is filed not later than 20 days
after the date of the entry of the ruling.
Regulatory Flexibility Analysis and Paperwork Reduction Act
In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.), the Agricultural Marketing Service has considered the economic
impact of this action on small entities and has certified that this
proposed rule will not have a significant economic impact on a
substantial number of small entities. For the purpose of the Regulatory
Flexibility Act, a dairy farm is considered a ``small business'' if it
has an annual gross revenue of less than $750,000, and a dairy products
manufacturer is a ``small business'' if it has fewer than 500
employees.
For the purposes of determining which dairy farms are ``small
businesses,'' the $750,000 per year criterion was used to establish a
production guideline of 500,000 pounds per month. Although this
guideline does not factor in additional monies that may be received by
dairy producers, it should be an inclusive standard for most ``small''
dairy farmers. For purposes of determining a handler's size, if the
plant is part of a larger company operating multiple plants that
collectively exceed the 500-employee limit, the plant will be
considered a large business even if the local plant has fewer than 500
employees.
At the time of the hearing, May 2002, there were 972 producers
pooled on, and 86 handlers regulated by, the Pacific Northwest order.
Based on these criteria, 596 producers or 61 percent of producers and
49 handlers or 57 percent of handlers would be considered small
businesses. The adoption of the proposed pooling standards service to
revise established criteria that determine those producers, producer
milk, and plants that have a reasonable association with, and are
consistently serving the fluid needs of, the Pacific Northwest milk
marketing area. Criteria for pooling milk are established on the basis
of performance standards that are considered adequate to meet the Class
I fluid needs of the market and that determine those that are eligible
to share in the revenue which arises from the classified pricing of
milk. Criteria for pooling are established without regard to the size
of any dairy industry organization or entity. The criteria established
are applied in an equal fashion to both large and small businesses.
Therefore, the proposed amendments will not have a significant economic
impact on a substantial number of small entities.
A review of reporting requirements was completed under the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was
determined that these proposed amendments would have no impact on
reporting, record keeping, or other compliance requirements because
they would remain identical to the current requirements. No new forms
are proposed and no additional reporting requirements would be
necessary.
[[Page 18835]]
This action does not require additional information collection that
requires clearance by the Office of Management and Budget (OMB) beyond
currently approved information collection. The primary sources of data
used to complete the forms are routinely used in most business
transactions. Forms require only a minimal amount of information, which
can be supplied without data processing equipment or a trained
statistical staff. Thus, the information collection and reporting
burden is relatively small. Requiring the same reports from all
handlers does not significantly disadvantage any handler that is
smaller than the industry average.
Prior documents in this proceeding:
Notice of Hearing: Issued November 14, 2001; published November 19,
2001 (66 FR 57889).
Tentative Final Decision: Issued August 30, 2002; published
September 6, 2002 (67 FR 56942).
Interim Final Rule: Issued November 8, 2002; published November 19,
2002 (67 FR 69668).
Preliminary Statement
A public hearing was held to consider proposed amendments to the
marketing agreement and the order regulating the handling of milk in
the Pacific Northwest marketing area. The hearing was held, pursuant to
the provisions of the Agricultural Marketing Agreement Act of 1937, as
amended (7 U.S.C. 601-674), and the applicable rules of practice and
procedure governing the formulation of marketing agreements and
marketing orders (7 CFR 900) at Seattle, Washington, on December 4,
2001, pursuant to a notice of hearing issued November 14, 2001, and
published November 19, 2001 (66 FR 57889). Upon the basis of the
evidence introduced at the hearing and the record thereof, the
Administrator, on August 30, 2002, issued a tentative final decision
containing notice of the opportunity to file written exception thereto.
The material issues, finding, conclusions, and rulings of the
tentative final decision are hereby approved and adopted and are set
forth herein. The material issues on the record of hearing relate to:
1. Standards for Producer Milk.
2. Standards for Pool Plants.
3. Determining if emergency marketing conditions exist that would
warrant the omission of a recommended decision and the opportunity to
file written exceptions.
Findings and Conclusions
The following findings and conclusions on the material issues are
based on evidence presented at the hearing and the record thereof:
1. Standards for Producer Milk--The Touch Base Standard
A proposal seeking to change certain standards and features of the
Producer milk provision of the order was adopted in the tentative final
decision and is adopted in this final decision. The changes include:
(1) Establish a year-round standard for the number of days in each
month that a dairy farmer's milk production needs to be delivered to a
pool plant in order for the rest of the milk of that dairy farmer to be
eligible for diversion to nonpool plants. This standard is often
referred to as a ``touch-base'' provision. A 3-day touch-base standard
is adopted in this decision. (2) Set a limit on the amount of milk that
can be diverted from pool plants to nonpool plants in each month of the
year. A diversion limit of 99 percent had been applicable in each of
the months of March through August, while a diversion limit of 80
percent had been applicable for each of the months of September through
February. The adopted year-round diversion limit is 80 percent of all
milk receipts, including diversions, and continues the current
diversion limits that were adjusted by the Market Administrator. (3)
Provide authority to the Market Administrator to adjust the touch-base
standard.
Proposal 2, offered by Northwest Milk Marketing Federation (NMMF),
Northwest Dairy Association (NDA), and Tillamook County Creamery
Association (TCCA), seeks to modify the order's pooling standards by
establishing a 6-day touch-base standard during the month in order for
the rest of the milk of a dairy farmer to be eligible to be diverted to
nonpool plants and by establishing an 80 percent year-round limit on
the amount of milk received by a pool plant that can be diverted to
nonpool plants. NMMF, NDA, and TCCA are organizations owned by dairy-
farmer members that supply a significant portion of the milk needs of
the Pacific Northwest marketing area and whose milk is pooled on the
Pacific Northwest order.
NDA, a proponent of Proposal 2, testified that pooling standards
must be changed in order to prevent what they described as
``artificial'' pooling or ``pool loading'' that has been occurring in
the Pacific Northwest order since the implementation of Federal order
reform. The NDA witness noted that when milk is pooled on the order but
never physically received, service to the Class I market is not
demonstrated. To allow the pooling of milk which does not provide
service to the Class I needs of the market only lowers returns to dairy
farmers whose milk is actually supplying the local Class I market. The
witness asserted that this occurs because the order's pooling standards
are inadequate.
According to the NDA witness, pooling provisions that were once
applicable in Federal orders more accurately identified the milk of
producers serving the Class I market. These provisions included a
touch-base standard that specified the minimum number of days during
the month that a dairy farmer's milk needed to be received at a pool
plant in order to be eligible to divert to nonpool plants the rest of
the milk of that dairy farmer. In addition, the witness noted that the
``dairy farmers for other markets'' provision, that was applicable
prior to order reform, provided that a dairy farmer would not be
considered a producer on the order unless all of the farmer's milk was
pooled on the order during the month. Also, the witness noted, milk was
valued and priced by its relative location to the market prior to order
reform. Milk farther from plants in the marketing area would have a
lower value than milk located nearer to plants located in the marketing
area, stressed the witness.
The NDA witness testified that provisions prior to Federal order
reform deterred milk that did not serve the Order's Class I market from
being pooled on the Pacific Northwest order. The witness explained that
milk located outside of the marketing area and pooled on the order
received the Pacific Northwest blend price minus the applicable
location adjustment specified in the order. This measure, the witness
said, made it unprofitable for milk located far from the marketing area
to be pooled on the Pacific Northwest order. However, the witness
emphasized that Federal order reform adopted a Class I price surface
that does not provide for location adjustments in determining a
relative value for milk to the market. According to the witness, the
newly adopted Class I price surface establishes fixed values for milk
regardless of its use for fluid or manufactured products. The witness
characterized that this change effectively created a ``backward
incentive'' to move milk from one order's bottling plant to a
manufacturing plant located farther away in another marketing order.
The NDA witness referred to a Cornell University economic model
that was used in formulating the current Class I
[[Page 18836]]
price surface. The model, according to the witness, produced a price
surface map that valued milk in the east higher than milk in the west,
inferring that milk should move from west to east. The witness asserted
that when establishing the new Class I price surface, the Department
did not take into account the variable price surface used by the model
for manufactured products. The witness noted that while the Class I
differential at Salt Lake City, Utah, is the same as in Seattle,
Washington ($1.90 per hundredweight), the Pacific Northwest order blend
price is often higher than the Western order blend price. According to
the witness, the combined effect of fixed Class I differential values
and blend price differences causes milk from Utah to move west to the
Pacific Northwest, instead of moving east as predicted in the Cornell
model.
The witness concluded that this movement of milk has resulted in
disorderly market conditions in the Pacific Northwest and Western
orders because the price surface provides an inappropriate incentive to
move milk to manufacturing plants in the Pacific Northwest order where
a higher Class I value prevails, rather than to bottling plants in the
Western order where a lower Class I value prevails. The witness
testified that the pooling provisions of the Pacific Northwest order
need revision to correct disorderly market conditions.
NMMF's witness, testifying in support of Proposal 2, stated that
the proposal is designed to correct unintended consequences generated
by Federal order reform regarding the manner in which the producer
location value of milk is determined. The witness testified that prior
to order reform, location adjustments also acted as an effective means
of identifying the producers who consistently served the Class I needs
of the market. The witness testified that Federal order reform also
established a new Class I price structure that reflected supply and
demand conditions for fluid milk in every county of the United States.
The witness asserted that this new structure uses the same Class I
pricing locations to adjust pool draws on all milk regardless of how
that milk is utilized.
According to the NMMF witness, under the new pricing system, milk
that is diverted from plants in the marketing area and delivered
hundreds of miles away can be valued at the same price as milk at the
plant from which the milk was diverted. Value is then adjusted, the
witness said, by differences in the level of the Class I differentials
where the milk is actually delivered. According to the witness, this
demonstrates a lack of economic consistency.
The NMMF witness also testified that millions of dollars have been
transferred from dairy farmers who actually supply the fluid needs of
the Pacific Northwest order to dairy farmers located in Southern Idaho
and Utah who do not supply the local Class I market. Also, data was
presented by the witness to demonstrate that when the milk of producers
distant to the market is pooled on the Pacific Northwest order but
never physically received at a Pacific Northwest pool plant, the milk
of those distant producers receives a share of the Class I proceeds
without the producers ever actually supplying milk to meet the Class I
needs of the market.
According to the NMMF witness, the 80 percent diversion limit
recommended in Proposal 2 would permanently continue the Market
Administrator's February 2001 temporary revision to the marketing
order. According to the witness, the 80 percent diversion limit has
been operating well and should become the order's adopted standard for
producer milk.
The NMMF witness also spoke on the merits of instituting a 6-day
touch-base standard. The witness was of the opinion that producer milk
standards should be linked to the order's supply plant performance
standard of 20 percent. According to the witness, 6 days of a dairy
farmer's milk production per month is equal to 20 percent of monthly
production and is consistent with the 20 percent performance standard
applicable for pool supply plants.
Exceptions to the tentative final decision from NMMF expressed
overall satisfaction with the decision in its ability to correctly
identify those producers who demonstrate service to the Pacific
Northwest Class I market. However, NMMF continued to express its
support for the adoption of a 6-day touch-base standard, instead of the
3-day touch-base standards that were adopted in the tentative final
decision. NMMF maintained that a 6-day touch-base standard would
require all producers to deliver the same percentage of milk to Pacific
Northwest pool plants.
Dairy Farmers of America (DFA), a supporter of Proposal 2,
testified about changes in the marketplace resulting from the new Class
I price surface implemented under Federal order reform. It was DFA's
opinion that the pooling of milk not serving the Class I market is
inconsistent with Federal order policy. Returns to producers who
regularly supply the Class I market are unnecessarily reduced when milk
that does not service the Class I market is pooled, said the witness.
The DFA witness also testified that milk not actually supplying the
Class I needs of the market but sharing in the revenue generated from
fluid milk sales is an indicator of faulty pooling provisions. The
witness asserted that if the current pooling standards are not amended,
local dairy farmers who are actually supplying the local Class I market
will continue to receive lower returns.
The DFA witness testified that the Pacific Northwest order's
current diversion limit standard of 99 percent for certain months is
inadequate because of the potential volume of milk that could be pooled
on the order. According to the witness, it is this shortcoming of the
current pooling provisions that has allowed milk which performs no
reasonable service in meeting fluid milk demands to be pooled on the
Pacific Northwest order. In this regard, DFA thought it was appropriate
to set a limit on the amount of producer milk that pool plants can
divert to nonpool plants consistent with the Market Administrator's
temporary revision. The DFA witness indicated that a year-round
diversion limit of 80 percent would be reasonable in light of the
marketing area's Class I use of milk. The witness also supported the 6-
day touch-base provision of Proposal 2 because it would better identify
the milk of those producers that actually serve the Class I needs of
the market.
Two Washington State dairy farmers also testified in support of
Proposal 2. One dairy farmer asserted that Proposal 2 would correct
what the witness described as a loophole in the Pacific Northwest
pooling provisions that allows milk which does not serve the fluid
market to be pooled on the Pacific Northwest order. The witness
maintained that current provisions are contributing to the loss of
millions of dollars to Washington State dairy farmers. The witness also
stated that adopting Proposal 2 would provide for restoring the orderly
marketing of milk in the Pacific Northwest and promote trust in the
Federal milk order program. A second dairy farmer testified that
disorderly marketing conditions are demonstrated when the blend price
is reduced through what the witness described as manipulation of the
order's pooling standards.
2. Standards for Pool Plants---Cooperative Pool Manufacturing Plant
Several amendments to the Pool plant provision of the Pacific
Northwest order were adopted in the tentative final
[[Page 18837]]
decision and are adopted in this final decision. Certain inadequacies
and unneeded features of the Pool plant provision contributed to
disorderly marketing conditions and unwarranted erosion of the blend
price received by those producers who actually supply milk to satisfy
the fluid demands of the Pacific Northwest marketing area.
Specifically, the following changes to the Pool plant provision were
adopted in the tentative final decision and are adopted in this final
decision: (1) Eliminate a supply plant feature applicable to
cooperative supply plants; (2) establish a ``cooperative manufacturing
plant'' provision; and (3) provide for two or more cooperative
manufacturing plants to operate as a ``system'' for the purpose of
meeting applicable performance standards.
A cooperative manufacturing plant is a type of pool supply plant
and will be defined as a manufacturing plant, operated by a cooperative
association or a wholly owned subsidiary, that delivers at least 20
percent of producer-member milk shipments either directly from farms or
supply plants owned by the same cooperative association and is located
within the marketing area. A cooperative manufacturing plant will have
the same performance standards applicable to a supply plant specifying
that 20 percent of total milk receipts must be supplied to a pool
distributing plant in order to pool all other physical receipts and
diversions of milk.
The Pacific Northwest marketing order Pool plant provision
contained a feature applicable for supply plants operated by a
cooperative association to include deliveries to distributing plants
directly from the farms of their producer members as qualifying
shipments for pooling.
Proposal 1, offered by NMMF, NDA, and TCCA seeks to establish a
``cooperative manufacturing plant'' provision as a type of pool supply
plant, and also to provide that two or more cooperative manufacturing
plants may operate as a ``system'' of supply plants for the purpose of
meeting pooling performance standards. According to the witnesses, the
proposal eliminates the need for the current provision for cooperative
associations that operate supply plants.
A witness for NMMF testified that the adoption of a provision
providing for a cooperative manufacturing plant as a type of supply
plant is predicated on the adoption of a touch-base standard contained
in Proposal 2. According to the witness, if a touch-base standard is
adopted, certain accommodations for cooperative manufacturing plants
should be provided to prevent the inefficient movement of milk. A
provision for a ``system'' of cooperative manufacturing plants should
be made, noted the witness, so that the system of plants could qualify
to have their combined milk receipts pooled when a single plant of the
system meets all of the performance standards for the system of plants.
The witness noted that providing this flexibility in the movement of
milk will enable cooperative manufacturing plants to minimize
transportation costs while still meeting the established touch-base
standard. The witness noted that a similar provision for cooperative
manufacturing plants is currently a feature of the Arizona-Las Vegas
and Western milk marketing orders and would be beneficial for the
Pacific Northwest order.
The NMMF witness predicted that the adoption of a cooperative
manufacturing plant provision would encourage all supply plants in the
Pacific Northwest to change their pooling status to this new type of
pool supply plant because all supply plants in the Pacific Northwest
are owned by cooperative associations. According to the witness, the
proposed changes contained in Proposals 1 and 2 would serve to deter
supply plants located far from the Pacific Northwest marketing area
from inappropriately pooling milk on the Pacific Northwest order
because these changes eliminate the ability to pool milk that is not
physically received at the plants which actually provide milk to
satisfy the marketing area's Class I demands.
A witness appearing on behalf of NDA, also a proponent of Proposal
1, agreed with the NMMF witness' conclusion that pooling provisions
should ensure that only milk which actually performs in supplying the
market's Class I needs would prevent the ``artificial'' pooling of
milk. The witness stressed that NDA does not object to milk located
outside of the order that regularly serves the fluid needs of the
market receiving the order's blend price.
The adoption of the proposed cooperative manufacturing plant
provision, according to the NDA witness, would provide producers who
regularly serve the fluid needs of the market more flexibility in
meeting the touch-base standard contained in Proposal 2. The witness
was in agreement with NMMF that the proposal would prevent the
inappropriate pooling of milk that is located at plants far from the
marketing area that does not actually supply the fluid needs of the
market. The NDA witness asserted that these changes to the order would
ensure that only milk actually available to meet the market's fluid
needs would be pooled.
A witness representing the TCCA also testified in support of
Proposal 1. The witness presented an analysis on the loss of income to
dairy farmers in Tillamook County, Oregon, due to the pooling of milk
on the order that does not actually serve the Class I needs of the
market. The impact of inappropriate pooling standards to Pacific
Northwest dairy farmers, according to the witness' calculations, showed
an average monthly decrease in revenue of $755 per farm. The witness
testified that the adoption of Proposal 1 would correct the disorderly
marketing conditions in the Pacific Northwest order by only allowing
milk that actually serves the fluid needs of the market to receive the
order's blend price.
The witness representing DFA testified in support of Proposal 1.
According to the witness, two primary benefits of the Federal order
program are allowing producers to benefit from the orderly marketing of
milk and the marketwide distribution of revenue that results mostly
from Class I milk sales. Orderly marketing influences milk to move to
the highest value use when needed and to clear the market when not used
in Class I, noted the witness. The witness testified that marketwide
pooling allows qualified producers to equitably share in the returns
from the market in a manner that provides incentives for supplying the
market in the most efficient manner. The witness insisted that the
pooling of milk which does not service the Class I market is
inconsistent with Federal order policy.
The DFA witness asserted that Proposal 1 properly addresses the
problem associated with what the witness described as the near ``open
pooling'' of milk on the Pacific Northwest order. Specifically, the
witness testified that the proposal would establish appropriate pooling
performance standards for producer milk and handlers that are
consistent with the objectives of the Federal milk order program.
Two members of the Washington State Dairy Federation also testified
in support of Proposal 1. One witness indicated that when milk not
serving the fluid needs of the Pacific Northwest market is pooled,
returns that should be received by producers serving the Class I needs
of the market are ``siphoned'' away. Another witness testified that
dairy producers in Washington have lost millions of dollars in revenue
as a result of the ``loopholes'' in the order's pooling provisions. The
adoption of Proposal 1 would, according to the witness, make
[[Page 18838]]
needed changes to the pooling standards and re-establish orderly
marketing conditions for the Pacific Northwest marketing area.
All milk marketing orders, including the Pacific Northwest, provide
standards for identifying producers and the milk of producers that
supply the market's Class I needs. The pooling standards of an order
serve to assure that an adequate supply of fluid milk is delivered to
the market. Pooling standards also act to identify the milk of those
producers that actually meets this need. Some milk orders have touch-
base standards to determine which dairy farmers and the milk of those
dairy farmers who perform in the market by delivering a certain amount
of production to pool plants. When such standards are met, the milk not
needed to meet fluid demands becomes eligible to be diverted to a
nonpool plant but still be pooled and priced by the order.
It is largely the revenue from Class I sales that provides
additional returns to milk being pooled which is reflected in the
order's blend price. Accordingly, the Federal order system consistently
has stressed actual performance in meeting pooling standards designed
to ensure an adequate supply of Class I milk for the market as a
condition for receiving the order's blend price.
The pooling standards of an order are designed to identify those
producers and the milk of those producers that demonstrate service to
the Class I market. A touch-base standard serves to identify the
producers and the milk of those producers who actually supply milk to
the market in a specified minimum amount. Markets that exhibit a higher
percentage of milk in fluid use typically have touch-base standards
specifying more frequent physical milk deliveries to pool plants than
in markets where Class I use is lower. When a touch-base standard is
too low, the potential for disorderly marketing conditions arise on two
fronts. First, pool plants are less assured of milk supplies. Second,
and most germane to the Pacific Northwest marketing area, the lack of a
touch-base standard provides a way for the milk of producers not
serving the fluid needs of the market to be pooled on the order while
not actually supplying milk to the market's pool plants. This reduces
the blend price paid to producers who are actually incurring the costs
of supplying the Class I needs of the market.
A significant portion of the testimony received at the hearing
placed blame on the current Class I price structure as the root cause
of the inappropriate pooling of milk on the Pacific Northwest order.
The current price structure was faulted specifically as not providing
location adjustments for milk as had been the case prior to the
implementation of milk order reform.
Testimony indicated that the lack of location adjustments
effectively undermines the pooling standards of the order. The decision
to pool milk was once based on the economics of transporting milk--
comparing the costs of transporting milk to the benefit of receiving
the order's blend price. Testimony indicates this factor is as
important as the pooling standards of the order. Hearing participants
were of the opinion that placing a relative value on milk based on its
distance from the market provided appropriate pooling discipline and
fostered orderly marketing conditions. Some participants indicated
disappointment by asserting that the Department did not offer a
recommended decision in order reform from which to provide comments on
the Class I pricing structure.
The reform of milk orders, contained in the recommended decision
(63 FR 4802) and final decision (64 FR 16026), made purposeful changes
to the Class I pricing structure. In this regard, a fixed adjustment
for Class I milk prices was provided for every county location in the
48 contiguous states to create a national Class I pricing surface for
the system of milk marketing orders. Changing this characteristic of
the pricing structure ensured handlers that regardless of the marketing
order by which regulated, the applicable prices would be the same.
Such change made a more clear distinction between the value milk
has at a location from the pooling standards of any individual
marketing order. Location adjustments were never a part of the pooling
standards of the Pacific Northwest order or any other milk marketing
order. Instead, location adjustments were an integral part of the
pricing provisions of the order. However, it should be noted that
location adjustments tended to strengthen the effectiveness of the
order's pooling standards. Location adjustments determined the relative
value of milk to the market. The pooling standards established the
criteria for pooling milk on the order. With the Class I price surface
adopted by order reform, more direct reliance is placed on pooling
standards to identify the milk that should be pooled on the order.
Pooling provisions of all orders, including the Pacific Northwest,
are intended to define appropriate standards for the prevailing
marketing conditions in assuring that the marketing area would be
supplied with a sufficient supply of milk for fluid use and to identify
those producers--and the milk of those producers--that actually service
the Class I needs of the market. Taken as a whole, the pooling
provisions of milk orders, including the Pacific Northwest order, are
contained in the Pool plant, Producer, and Producer milk provisions.
The intent of these pooling provisions prior to reform and after reform
has not changed.
The issue before the Department is to consider amendments to
standards of the order that currently allow milk to be pooled on the
Pacific Northeast order without such milk being regularly and
consistently supplied to pool plants within the marketing area in order
to supply the market's Class I needs. On the basis of the record, the
pooling standards of the order need to be reconsidered.
It is the pooling standards of the order that identifies those
producers who are relied upon to supply the Class I needs of the
marketing area. As specified in the tentative final decision, the
record evidence indicates that milk is being pooled on the Pacific
Northwest order which does not demonstrate any reasonable association
with the market and which is not actually received at pool plants that
supply the Class I demands of the market. Instead, the milk being
pooled is physically retained at plants located in another marketing
area for manufacturing lower valued Class III or Class IV dairy
products. This is causing producers who actually supply the market to
receive a lower blend price.
On the basis of the record evidence, together with analysis
performed by the Department, the tentative final decision and this
final decision find reason to support adopting a 3-day touch-base
standard. Analysis was performed using officially noticed Market
Administrator data from June 2001 through April 2002. This time period
was selected because of the change in Commodity Credit Corporation
(CCC) purchase prices for butter and nonfat dry milk that occurred on
May 31, 2001, as part of the price support program. This change in the
CCC support purchase prices has caused the price gap between Class III
and Class IV milk to be significantly reduced. This change in CCC
purchase prices has had a noticeable effect on the total value of the
marketwide pool for both the Pacific Northwest and Western orders.
Hypothetical blend prices were computed for the Pacific Northwest
order marketing area, absent the Class III and Class IV milk physically
located in areas within the Western Order milk marketing area. Milk
from this area had not historically been pooled on the Pacific
Northwest. Additionally, blend
[[Page 18839]]
prices were computed for the Western Order that assumed the Class III
and Class IV milk pooled on the Pacific Northwest Order would instead
be pooled on the Western order. The results indicated that the blend
prices received by dairy farmers pooled in the Pacific Northwest would
increase, while the blend prices received by dairy farmers pooled on
the Western order would decrease.
Analysis of the newly derived blend price differences was performed
to determine how many days of a dairy farmers' production could seek to
be received at a pool plant in the Pacific Northwest so that the costs
of shipping milk to the market would not exceed the benefits of being
pooled. The results of this analysis ranged from a low of 1 day's milk
production in the month of February 2002 to a high of 5 day's milk
production in June 2001.
On average the milk of a dairy farmer could be received at a pool
plant in the Pacific Northwest order 3 days per month to adequately
demonstrate that the milk of a producer is actually providing a
reasonable and consistent service in meeting the fluid needs of the
marketing area.
Providing a higher (3-day) touch-base standard requires milk
located outside the marketing area to demonstrate its availability to
service the Class I needs of the Pacific Northwest marketing area.
While this standard should continue to assure an adequate supply of
Class I milk, it also will serve as a safeguard against the unwarranted
erosion of blend prices caused by the pooling of milk which could not
reasonably be determined as bearing the cost associated with serving
the fluid needs of the market.
The establishment of a touch-base standard also reinforces the
integrity of the order's other performance standards. Together with
providing for a cooperative manufacturing plant and their system
pooling, reasonable assurance is provided that milk which does not
regularly service the fluid needs of the market will not receive the
Pacific Northwest order's blend price. Additionally, this decision
provides authority for the Market Administrator to adjust the touch-
base standard in the same way the order currently provides authority
for the Market Administrator to adjust the performance standards for
supply plants and diversion limits for all pool plants.
Providing for the diversion of milk is a desirable and needed
feature of an order because it facilitates the orderly and efficient
disposition of milk not needed for fluid use. When producer milk is not
needed by the market for Class I use, some provision should be made for
milk to be diverted to nonpool plants for use in manufactured products
but still be pooled and priced under the order. However, it is just as
necessary to safeguard against excessive milk supplies becoming
associated with the market through the diversion process.
Milk diverted to nonpool plants is milk not physically received at
a pool plant. However, it is included as a part of the total producer
milk receipts of the diverting plant. While diverted milk is not
physically received by the diverting plant, it is nevertheless an
integral part of the milk supply of that plant. If such milk is not
part of the integral supply of the diverting plant, then that milk
should not be associated with the diverting plant and should not be
pooled.
A diversion limit establishes the amount of producer milk that may
be associated with the integral milk supply of a pool plant. With
regard to the pooling issues of the Pacific Northwest order, the record
reveals that high diversion limits contributed to the pooling of large
volumes of milk on the order that may not have serviced to the Class I
market needs. Therefore, lowering the order's diversion limit standard
would be appropriate.
Associating more milk than is actually part of the legitimate
reserve supply of the diverting plant unnecessarily reduces the blend
price paid to dairy farmers who service the market's Class I needs.
Without reasonable diversion limits, the order's ability to provide for
effective performance standards and orderly marketing is weakened.
Diversion limit standards that are too high can open the door for
pooling more milk on the market, as seen with the 99 percent diversion
limit that had been applicable for the months of March through August
prior to the adjustments made by the Market Administrator in February
2001. With respect to the marketing conditions of the Pacific Northwest
marketing area evidenced by the record, the tentative final decision
and this final decision find good reason to continue with the diversion
limits on producer milk set by the Market Administrator at 80 percent
of total receipts as the order's diversion limit standard for every
month of the year.
Therefore, an 80 percent diversion limit standard for producer milk
in each month of the year is adopted in this final decision. To the
extent that this diversion limit standard may warrant future
adjustments, the order already provides the Market Administrator
authority to adjust these diversion standards as marketing conditions
may warrant.
The tentative final decision and this final decision find that
several changes to the pooling standards contained in the Producer milk
definition of the order are needed to reinforce the integrity of the
other changes made in this decision that affect supply plants. As
indicated earlier, the record indicates that the pooling provisions of
the Pacific Northwest order were inadequate. This tentative final
decision and this final decision find that the absence of a touch-base
standard result in the inability to adequately and properly identify
the milk of those producers who should be pooled. The lack of a touch-
base standard together with a 99 percent diversion limit applicable in
the months of March through August resulted in the pooling of more milk
than could reasonably be considered as actually serving the market's
Class I needs. These inadequacies of the Pacific Northwest order
resulted in pooling milk which can not demonstrate actual service in
supplying the Class I needs of the market. Such inadequacies contribute
to the unnecessary erosion of the order's blend price to those
producers who do demonstrate such service.
Lastly, the tentative final decision and this final decision find
agreement with the proponents of Proposal 1 that a cooperative
manufacturing plant provision will provide flexibility in qualifying
milk to be pooled. Allowing cooperative manufacturing plants the option
to function as part of a pooling system will assist producers and
handlers in transporting milk in the most cost-efficient manner. This
provision gives the cooperatives operating manufacturing plants the
ability to supply milk to distributing plants from a plant of the
system located nearer a distributing plant without causing disruption
to the market. System pooling allows cooperative manufacturing plants
to make more cost-effective decisions in transporting milk while still
satisfying the Class I demands of the order without disruption.
3. Emergency Marketing Conditions
Evidence presented at the hearing establishes that the pooling
standards of the Pacific Northwest order are inadequate and were
resulting in a significant present and ongoing erosion of the blend
price received by producers who actually demonstrate performance by
supplying the Class I needs of the market. This unwarranted erosion of
blend prices stemmed from the lack of a reasonable and effective
standard to ensure that the milk of the producer being pooled was
actually being
[[Page 18840]]
delivered to pool plants that supply milk to meet the Class I needs of
the market. The erosion of the blend price received by producers was
also compounded by an unnecessarily high diversion limit standard for
the months of March through August. These shortcomings had allowed milk
that had not provided a reasonable expectation of or demonstration of
service in meeting the Class I needs of the marketing area to be pooled
on the order. Consequently, it was determined that emergency marketing
conditions exist in the Pacific Northwest marketing area, and the
issuance of a recommended decision was therefore omitted.
Rulings on Proposed Findings and Conclusions
Briefs, proposed findings and conclusions were filed on behalf of
certain interested parties. These briefs, proposed findings and
conclusions, and the evidence in the record were considered in making
the findings and conclusions set forth above. To the extent that the
suggested findings and conclusions filed by interested parties are
inconsistent with the findings and conclusions set forth herein, the
requests to make such findings or reach such conclusions are denied for
the reasons previously stated in this decision.
General Findings
The findings and determinations hereinafter set forth supplement
those that were made when the Pacific Northwest order was first issued
and when it was amended. The previous findings and determinations are
hereby ratified and confirmed, except where they may conflict with
those set forth herein.
(a) The tentative marketing agreement and the order, as hereby
proposed to be amended, and all of the terms and conditions thereof,
will tend to effectuate the declared policy of the Act;
(b) The parity prices of milk as determined pursuant to section 2
of the Act are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the marketing area, and the minimum
prices specified in the tentative marketing agreement and the order, as
hereby proposed to be amended, are such prices as will reflect the
aforesaid factors, insure a sufficient quantity of pure and wholesome
milk, and be in the public interest; and
(c) The tentative marketing agreement and the order, as hereby
proposed to be amended, will regulate the handling of milk in the same
manner as, and will be applicable only to persons in the respective
classes of industrial and commercial activity specified in, the
marketing agreement upon which a hearing has been held.
Rulings on Exceptions
In arriving at the findings and conclusions, and the regulatory
provisions of this decision, the one exception received was carefully
and fully considered in conjunction with the record evidence. To the
extent that the findings and conclusions and the regulatory provisions
of this decision are at variance with the exception, such exception is
hereby overruled for the reasons previously stated in this decision.
Marketing Agreement and Order
Annexed hereto and made a part hereof is one document: A Marketing
Agreement regulating the handling of milk. The order amending the order
regulating the handling of milk in the Pacific Northwest marketing area
was approved by producers and published in the Federal Register on
November 19, 2002 (67 FR 69668), as an Interim Final Rule. Both of
these documents have been decided upon as the detailed and appropriate
means of effectuating the foregoing conclusions.
It is hereby ordered that this entire final decision and the
Marketing Agreement annexed hereto be published in the Federal
Register.
Determination of Producer Approval and Representative Period
December 2003, is hereby determined to be the representative period
for the purpose of ascertaining whether the issuance of the order, as
amended in the Interim Final Rule published in the Federal Register on
November 19, 2002 (67 FR 69668), regulating the handling of milk in the
Pacific Northwest marketing area is approved or favored by producers,
as defined under the terms of the order (as amended and as hereby
proposed to be amended) who during such representative period were
engaged in the production of milk for sale within the aforesaid
marketing area.
List of Subjects in 7 CFR Part 1124
Milk Marketing order.
Dated: April 5, 2004.
A.J. Yates,
Administrator, Agricultural Marketing Service.
Order Amending the Order Regulating the Handling of Milk in the Pacific
Northwest Marketing Area
This order shall not become effective unless and until the
requirements of Sec. 900.14 of the rules of practice and procedure
governing proceedings to formulate marketing agreements and marketing
orders have been met.
Findings and Determinations
The findings and determinations hereinafter set forth supplement
those that were made when the order was first issued and when it was
amended. The previous findings and determinations are hereby ratified
and confirmed, except where they may conflict with those set forth
herein.
(a) Findings. A public hearing was held upon certain proposed
amendments to the tentative marketing agreement and to the order
regulating the handling of milk in the Pacific Northwest marketing
area. The hearing was held pursuant to the provisions of the
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure (7 CFR part
900).
Upon the basis of the evidence introduced at such hearing and the
record thereof, it is found that:
(1) The said order as hereby amended, and all of the terms and
conditions thereof, will tend to effectuate the declared policy of the
Act;
(2) The parity prices of milk, as determined pursuant to section 2
of the Act, are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the aforesaid marketing area. The minimum
prices specified in the order as hereby amended are such prices as will
reflect the aforesaid factors, in sure a sufficient quantity of pure
and wholesome milk, and by in the public interest; and
(3) The said order as hereby amended regulates the handling of milk
in the same manner as, and is applicable only to persons in the
respective classes of industrial or commercial activity specified in, a
marketing agreement upon which a hearing has been held.
Order Relative to Handling
It is therefore ordered, that on and after the effective date
hereof, the handling of milk in the Pacific Northwest marketing area
shall be in conformity to and in compliance with the terms and
conditions of the order, as amended, and as hereby amended, as follows:
The provisions of the order amending the order contained in the
interim amendment of the order issued by the Administrator,
Agricultural Marketing Service, on November 8, 2002, and published in
the Federal Register on November 19, 2002 (67 FR 69668), are
[[Page 18841]]
adopted without change and shall be and are the terms and provisions of
this order.
[This marketing agreement will not appear in the Code of Federal
Regulations]
Marketing Agreement Regulating the Handling of Milk in Certain
Marketing Areas
The parties hereto, in order to effectuate the declared policy of
the Act, and in accordance with the rules of practice and procedure
effective thereunder (7 CFR part 900), desire to enter into this
marketing agreement and do hereby agree that the provisions referred to
in paragraph I hereof as augmented by the provisions specified in
paragraph II hereof, shall be and are the provisions of this marketing
agreement as if set out in full herein.
I. The findings and determinations, order relative to handling, and
the provisions of Sec. Sec. 1124.1 to 1124.86 all inclusive, of the
order regulating the handling of milk in the Pacific Northwest
marketing area (7 CFR part 1124) which is annexed hereto; and
II. The following provisions: Record of milk handled and
authorization to correct typographical errors.
(a) Record of milk handled. The undersigned certifies that he/she
handled during the month of December 2003, ---------- hundredweight of
milk covered by this marketing agreement.
(b) Authorization to correct typographical errors. The undersigned
hereby authorizes the Deputy Administrator, or Acting Deputy
Administrator, Dairy Programs, Agricultural Marketing Service, to
correct any typographical errors which may have been made in this
marketing agreement.
Effective date. This marketing agreement shall become effective
upon the execution of a counterpart hereof by the Department in
accordance with Section 900.14(a) of the aforesaid rules of practice
and procedure.
In Witness Whereof, The contracting handlers, acting under the
provisions of the Act, for the purposes and subject to the limitations
herein contained and not otherwise, have hereunto set their respective
hands and seals.
Signature By (Name)
(Title)----------------------------------------------------------------
(Address)--------------------------------------------------------------
(Seal)
Attest
[FR Doc. 04-8070 Filed 4-8-04; 8:45 am]
BILLING CODE 3410-02-P